Micro small and medium enterprises (MSMEs) have been accepted as the engine of economic growth and for promoting equitable development for any country. They are the manifestation of the entrepreneurial spirit of a nation and society. The labor intensity of the MSME sector is much higher than that of large enterprises. The MSMEs constitute over 90% of total enterprises in most of the economies and are credited with generating the highest rates of employment growth and account for a major share of industrial production and exports.
The MSMEs play a vital role in the overall growth of the industrial economy of the country. With its agility and dynamism, the sector has shown admirable innovativeness and adaptability to survive the recent economic downturn and recession and has lots of opportunities to grow in the future. This paper enlightens the growth of MSMEs and outlining the opportunities available for them in the Indian economy.
MSMEs are the growth accelerators of the Indian economy, contributing about 30% of the country’s gross domestic product (GDP). In terms of exports, they are an integral part of the supply chain and contribute about 40% of the overall exports. MSMEs also play an important role in employment generation, employing about 110.1 million people across the country. Interestingly, MSMEs are intertwined with the rural economy as well, as more than half of the MSMEs operate in rural India. MSME sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. MSMEs not only play a crucial role in providing large employment opportunities at comparatively lower capital costs than large industries but also help in the industrialization of rural & backward areas. This leads to a reduction in regional imbalances, apart from more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and they contribute enormously to the socio-economic development of the country. Ministry of MSME envisions a vibrant MSME sector by promoting growth and development of the MSMEs in various sectors, including khadi, village, and coir industries, in cooperation with concerned ministries/departments, state governments, and other stakeholders, through providing support to existing enterprises and encouraging the creation of new ones.
COVID-19 & MSMEs: The Identification Problem
MSMEs are perhaps one of the hardest hit due to the COVID-19 lockdown in India. With severe supply-chain disruptions, especially for those businesses which do not manufacture or provide essential services, the capacity to continue paying workers (without any reductions) during the lockdown, as per government directives, looks bleak. Reports from across the country raise similar concerns about the inability of these businesses to meet immediate capital requirements.
The government has announced that a stimulus package focused on the MSME sector is in the pipeline, to address medium- and long-term issues that will impact their resilience. Emergency credit lines introduced by public sector banks (PSBs); a concessional interest rate loan announced by the small industries development bank of India (SIDBI) specifically for MSMEs engaged in manufacturing goods or providing services related to COVID-19; and deferring GST (goods and services tax) payments until June 2020. While these are good steps to be taken to ease short-term liquidity concerns, the stimulus package focused on the MSME sector will have to be more far-reaching in nature.
Governments across the world have been introducing a range of measures to infuse more confidence and credit into their small business lines. These measures include providing short-term liquidity to those which are affected and also involve wage support/subsidy (capped) for a period of three to six months, direct subsidies to one-person businesses and micro-units, deferral of rent and utility payments, compensation for the decrease in turnover during lockdown periods, etc. While India must consider introducing such financial and safety net measures as well, the real challenge will lie in identifying these 63.4 million unincorporated MSMEs, of which 99% are micro-enterprises that remain largely informal.
Informality in the MSME sector
The number of enterprises in the unorganized sector (unregistered) is estimated to be 99.7% of all unincorporated non-agricultural enterprises (excluding construction). What is also pertinent to note is that 84.17% of this universe of unincorporated businesses comprises owner-managed/self-employed firms (with characteristic features of household enterprises). The next highest share is of units that employ up to five workers (micro-units). The international labor organization (ILO) has specifically highlighted how economies with large informal sectors will need to acknowledge and act on the fact that workers in such sectors have no income replacement and are directly affected by lockdown measures – the worst affected group being the self-employed, street vendors, hawkers, construction, transport, and domestic workers, only to name a few.
Issues in Identification
The lack of a comprehensive dataset on MSME units and their employment profiles will exacerbate issues of targeted relief delivery in this crisis situation. An RBI expert committee on MSMEs, in June 2019, has also noted the absence of reliable (and updated) information on this key sector of the economy. This renders the job of the government of providing direct aid workers in micro-businesses or providing a separate set of relief measures for say self-employed / owner-managed enterprises. With the containment of the pandemic and the occasional concomitant lockdown nowhere in sight, only currently available structures/mechanisms can be relied upon to identify MSMEs and take relief measures. Some of these measures are discussed briefly here.
Targeted relief delivery for MSMEs: Potential Mechanisms
- The SIDBI, a financial institution set up for the promotion and development of the MSMEs, must spearhead the cause of targeted loan delivery. The Bank has already announced emergency assistance loans and must ramp up efforts in financing and refinancing this sector. This assumes significance in light of the fact that as per RBI’s data on sectoral deployment of non-food credit, the MSMEs’ share in total outstanding bank credit has fallen to 5.37%, as of February 2020 (it clocked 5.58% share in March 2019). Dwindling share of MSMEs in bank credit is another disturbing fact – the weighted average lending rate to the MSMEs is 11.24% – the second-highest amongst different segments. The need to push cheaper credit to these enterprises cannot be overstated, and SIDBI will be the ideal institution to spearhead this agenda, given its vast network and experience in this sector.
- There have been serious concerns around the MUDRA scheme in the recent past, in terms of these collateral-free loans coalescing into NPAs. However, information about enterprises that have availed of this scheme will be vital for general enterprise identification in this crisis. The bulk of these loans is known to be sanctioned in the Shishu category that loans up to INR. 50,000, with many of these beneficiaries being women. Around 13 million accounts have received these loans as of FY (fiscal year) 2018-19, and 10 million enterprises are reported to avail of this scheme each year, since roll-out. Financial institutions should be able to draw up information about MUDRA beneficiaries and their employment profile to establish potential firm size, sector and employment profile, location, and other such details.
- The UAM and the MSME databank, as mentioned in the previous section, are also additional avenues for better identification of enterprises. As per UAM databank records, there are 12 million registrations as of date, while the MSME Databank is seen to have much fewer registrations at 160,000. It is unclear whether there are any overlaps between these two datasets. Irrespective of the same, basic information on 10 million MSMEs can be assumed to be readily available with the MSME Ministry.
- The Jan Dhan, Aadhaar, and Mobile (JAM) trinity is being utilized to push direct cash transfers provided under the first stimulus package that the government announced days into the lockdown. While state-wise presence on JAM varies, it might be a good mechanism for wage support transfers to daily wage and casual workers, who have been unable to collect payments (in cash) from their employers due to the lockdown affecting movement. If wage support is rolled out for labor/workforce in MSMEs, the JAM would be an ideal mechanism to be used for cash transfer. The importance of a wage (and incentives) support program also is highly advocated by the ILO. A recent report mentions that countries such as India, Brazil, and Nigeria, with a ‘lion’s share of the workforce in the informal sector, will need to introduce such wage support to thwart an increase in poverty in working classes.
- It is critical to note that while tax cuts may be necessary for larger businesses, such measures will exclude the informal sector where employment and turnover do not meet the minimum thresholds required to pay income tax or to be registered under the GST. Relief for informal workers and tiny micro-enterprises with 5-10 workers, will need to be targeted in such a way that it reaches them, and in time to save their lives and livelihoods. The role that the trade unions and other labor market institutions in India can play in identifying these businesses and workers, should also be encouraged. The government will need to collaborate with manufacturing and retail trade associations and pay heed to the findings from surveys they have been conducting with their member businesses.
- Permanent structures to support the informal sector have been long overdue, and the hope is that these will be set up immediately post-crisis recovery. For now, it is clear that money is not the real challenge. The real challenge is in choosing the ideal mechanism to direct relief to the targeted vulnerable group.
As it is, India was reeling under a slowdown of the economy before the onset of COVID-19. This COVID- 19 pandemic has now struck as a proverbial last straw on the camel’s back. Burdened by fixed costs of employees, rentals, finances, electricity, etc. on one hand; and cancellation or drying up of orders, default on payment by customers, and non-availability of funds on the other hand; many MSMEs are forced to either shut the shutter or go bankrupt.
Recent relief packages announced by RBI, PSBs, and SIDBI, especially for MSMEs, are at best capable of providing symptomatic relief. While some more quick-fix solutions are being worked out, it may be prudent to put a long-term strategy in place, keeping a fast-changing business environment in view.
Special Characteristics of MSMEs
- Vast discrepancies in legal structure. It is estimated that 63.4 million MSMEs are unincorporated. Out of these, 99% are in the micro sector, functioning in an informal way.
- Vast product and services range. 31% of all MSMEs are in manufacturing, 36% are in trading, and the balance 33% are in services. 51% of these MSMEs are in rural areas.
- Mostly starved of cash flow. Except for a few MSMEs, which are well established and have developed a good way of generating capital resources; others rely mostly on working capital through loans and cash inflow from sales. The outstanding credit by banks is only 5.37% that too much at a weighted average interest rate of 11.24% per annum. Structurally, strong MSMEs are better placed to brave the current turmoil. Hence, they enjoy better eligibility for financial assistance.
- Agile is like a fighter aircraft. As most MSMEs are managed on an ownership basis, their capability to re-position their products or services to meet changing market requirements, and also to ramp up or ramp down, is great.
- Market reach, productivity, and visibility. MSMEs lack basic capabilities to enhance their market reach, adopt new software-driven productivity tools and use social media for greater visibility.
Need of Comprehensive Package
Secretary MSMEs has stated that thrust in the coming days will be on small businesses to come out of distress, which is a very welcome statement. This immediate aim of bringing the MSMEs out of distress is apt. However, such a package must be comprehensive in nature. At the same time, the government should put plans in place in order to reposition these MSMEs to grab new opportunities arising out of changing world order due to COVID-19. Here are a few suggestions:
- Financial Support. While this is the most obvious action, the problem lies is in the enforcement of government directives and ensuring that the benefits reach down to eligible micro industries. In the first case, even when government directive for banks to give loans without collaterals exists, the banks demand collaterals. Here Government must give guarantees. Ensuring that the package reaches all the eligible entities is a major problem. This is so as most of them are household entities, with no proper records available with government departments. This calls for a highly flexible approach. For this, data is available in various schemes like MUDRA, UAM (Udyog adhar memorandum), MSME database, and the trinity: Jan Dhan, Adhar and mobile (JAM), etc.; should be tapped.
- Prepare them for the future. In this regard, enhanced skill training, an adaptation of the right digital tools, enhanced use of social media should be encouraged. MSMEs should be provided access to the market by enhancing incentives to their customers and making their reserved quota more attractive. Centralized platforms need to be provided to increase their market reach. Given India’s software prowess, building such platforms should not pose a major problem. The focus should be on productivity, with emphasis on the implementation of IR4.0 (Industrial Revolution 4.0). Similarly, product quality has to be ensured. All these measures will enhance their competitiveness. As India is positioning itself to be the global manufacturing and services hub, MSMEs will be able to grab a big chunk out of this and play a humongous contributory role.
- Help them to help themselves. As stated earlier, MSMEs are highly flexible. This has been amply proved in recent times, where some of them have generated opportunity amongst COVID-19 pandemic. Many of them have started manufacturing PPE, masks, and sanitizers. Many chemical companies have repurposed their operations towards the manufacture of sanitizers and health products such as immunity boosters. There are MSMEs who are forming clusters to manufacture components of ventilators and producing reagents in volumes for use in COVID-19 testing kits. The formation of clusters is a very smart move as it will make it easier for the government to provide support to them. In addition, a large number of SEZs are coming up along the highways; these will need a large network of ancillaries. This is where the government can play an enabling role by providing incentives, access to the market, financing, and making infrastructure highly economical.
Apart from such measures, it is also imperative that a plan be drawn up to allow businesses to reopen actively, in a phased manner, with observance of necessary safety protocols. Regular and surprise checks may be introduced to enforce state guidelines. It is important to now engage with the idea of slowly restarting business operations in areas with low infection levels, albeit with mandatory precautionary measures in place. Unfortunately, COVID-19 is a crisis with an unforeseeable ending. What is clear though is that both the government and the businesses—both large and small—will have to work together to ensure the protection and safety of workers, be ready for risk-management associated with the phased re-starting of business operations and be prepared and open to structural changes in business activities.
Self – Sustained Economic growth through Secured Governance
Secured Governance offers a strategy for the government to get all the basic infrastructure development in place with a negligible investment by the Government. It is a concept of developing techno-economic corridors connecting HUBs which will act as growth centers for individual sectors. The very concept of ‘secured’ here implies a secured convergence or knitting with various sectors defining a growth for an economy.
Secured Governance – A Holistic Approach to Infrastructure Development
Secured Governance is a concept that is catching the attention of many as a holistic approach to infrastructure needs, promising a great deal. It professes taking advantage of the valuation of assets created and delivering them at negligible cost to the government. It aims at balanced growth in all sectors which are in need of better facilities, in a more holistic manner, rather than focusing only on saying expressways, or power or any one of the numerous other sectors. While addressing any one of them, the others also get due attention ensuring their all-around development. It promises more societal participation and sharing of benefits with transparency. Underlying this is a strategy of developing techno-economic corridors, connecting urban areas across the entire breadth and length of the country.
Secured Governance advocates a pragmatic approach of taking Advantage of Valuation of Assets Created
This is not new. We are aware of the fact that when development takes place, there is an accretion to the valuation of the property. Who benefits from this? Often, it is incidental and is taken advantage of by land and property sharks. Imagine a model where this accretion to valuation can be plowed back into the project and benefits the people around. First, the cost of the project is reduced and can be negligible to the government, if carefully planned. Next, the population perceives it as beneficial to them, which will trigger their whole-hearted participation, helping with the early completion of the project rather than being an impediment. Hence it is a win-win situation for all.
Secured Governance Strategy for MSMEs
- Each company should be a living entity, which cannot be closed, although its ownership may be transferred.
- All companies and owners have to provide information on the yearly and cumulative dates of the total taxes paid, the number of persons directly and indirectly employed, CSR, and social work done.
- Companies should also be rated based on the interest paid on loans taken by them, along with their management.
- For larger companies on the management front, proper positioning of the owners, and the positive role played by the independent directors for the overall growth and should also be rated.
- Banks, large enterprises, and trusts should be encouraged to start industrial hubs. They could also act as anchor organizations complimenting and ensuring long-term growth.
- These should be properly strategized taking a global view.
- Encourage active association with international business and participation of the funding houses.
- Overseas Indians should be encouraged to be actively involved in all these. They should be encouraged to set up banks and fiduciaries for easy inflow of their investments and FDIs into the country.
Secured governance complements the present PPP developmental model by ensuring balanced participation of the private and public sectors by taking advantage of the value and valuation of MSME clusters. This will lead to higher returns for them. This valuation of clusters, which grows manifold, needs to be shared by society and by the private investors to support other infrastructure development, ensuring balanced growth. This will have a spiraling effect on the global economy with defined regions being developed as “MSME HUBs” and multiple HUBs connecting each other creating a techno-economic corridor. The mini and nanoclusters will be spread over semi-urban and remote rural regions promoting industrial development and adoption of modern infrastructure and technologies to generate additional employment in those areas with minimal rural-urban migration. Besides, this will pay rich dividends to elite and rich investors, which will prompt them to invest in them.
The imperative of rapid scaling up of the entrepreneurs – in the private sector (developers, contractors, consultants, financial intermediaries, and investors) – entails developing and implementing business centers of the required scale and within the tight envisaged timeframe.
Lastly, to implement an ambitious roadmap for these MSMEs, improved standards of secured governance and concerted action would be required to take these targets and goals from inspirational statements to their actual realization. We need a system to integrate economic interdependence in today’s modern societies which not only decreases uncertainty or risk along the entire journey, but also helps in judicious planning and development of new empowered, transparent, and interdependent governance systems with a higher degree of social participation in the nation-building process. Secured governance is an ideal strategy that equips the stakeholders in the creation of adequate and coordinated measures to ensure the provision of financial, human, technical, information, and other capacity-building resources.
Secured governance has major characteristics like participation, rule of law, transparency, responsiveness, equity and inclusiveness, effectiveness, efficiency, accountability and strategic vision, and consensus orientation. Challenge lies in the creation of a system of governance that promotes, supports, and sustains development. With improved resource allocation, enhanced governance, interdependency among sectors, and transparency in the system; going hand in hand with information technology and innovation, delivery of a safer, cleaner, and more accountable self-sustaining infrastructure and services can be ensured. A high degree of technical integration and economic interdependence in modern societies will also decrease uncertainty or risk along the entire journey. Besides, it will help them to judiciously plan and be prepared for even minor events. This will ring in societal participation in the nation-building process and going a long way in making Atmanibhar Bharat a reality.
Dr. P. Sekhar, Chairman,
Global Smart City Panel,
Maj Gen Tajuddin Moulali Mhaisale,
VSM; M Tech IIT(D),
Reputed Speaker in International forum and Innovator